And while this strategy works well for some homeowners, there are three key mistakes to avoid when you are negotiating a deed in lieu of foreclosure.
Make sure your debt is forgiven. Simply transferring the deed to your mortgage lender does not necessarily absolve you of your home loan debt. For a deed in lieu of foreclosure to fully remove your obligation on the home loan, the lender must agree in writing that the debt is absolved. To avoid future liability, make sure the release of your liability on the debt is an explicit part of the deed in lieu transaction.
Address potential tax issues. Every transfer of property, including a deed in lieu of foreclosure, involves some tax payments. In Illinois, taxes vary by region (Chicago property sales, for example, are more expensive than those in Springfield), but they tend to be significant regardless of your location. If your lender is willing to pay these taxes, that certainly helps, but if you’ll be responsible for extra payments, you may not want to pursue a deed in lieu of foreclosure.
Consider foreclosure alternatives. A deed in lieu of foreclosure may sound appealing, but it will still show up on your credit report as a foreclosure, and it will likely force you to leave your home very quickly. Other options include fighting the foreclosure in an Illinois court or agreeing to a short sale.
In addition, you should remember that signing a deed in lieu of foreclosure without consulting an Illinois attorney may be a mistake. If you choose to fight the foreclosure in court, you may be able to stay in your home for several years.
On the other hand, you could explore a short sale, which allows you to sell your home and give the proceeds to your bank. With a short sale, you may be able to repay your debt entirely, which reduces the odds that your lender will pursue a deficiency judgment.